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Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal

Author

Listed:
  • Gopal Prasad Bhatta, PhD

    (Nepal Rastra Bank (Central Bank of Nepal))

  • Anu Mishra

    (Kings College, Nepal and freelance researcher in public and financial economics)

Abstract

One of the common agenda of underdeveloped economies is to achieve a high and sustainable level of economic growth in the long run. Domestic and external borrowings are playing a crucial role in fulfilling the resource gap in the context of Nepal for a long period. A growing number of recent studies support the idea of a debt threshold level (turning point) above which debt starts reducing economic growth. This paper empirically investigates the relationship between economic growth and several other factors (investment, trade openness, population growth, domestic savings, and government debt) in the context of Nepal. The debt-growth relationship has been estimated by regression analysis and further explored the non-linear relationship between public debt and economic growth using time series annual data for the period of 1976-2019. The ARDL bound technique has been applied to estimate the short-run and the long run impact of debt on economic growth. Moreover, a quadratic bivariate model based on ARDL coefficients has been estimated to identify the growth maximizing level of debt. The estimated parameters confirm the optimum public debt to GDP ratio in the context of Nepal is 33 per cent. The policy implication of this finding for the Government of Nepal (GoN) is to ensure public debt management in line with the growth maximizing debt threshold. Further, a high level of trade deficits and government effectiveness in public sector management squeezes the fiscal space in utilizing adequate public debt in Nepal.

Suggested Citation

  • Gopal Prasad Bhatta, PhD & Anu Mishra, 2020. "Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 32(2), pages 1-28, October.
    • Handle: RePEc:nrb:journl:v:32:y:2020:i:2:p:1
    DOI: https://doi.org/10.3126/nrber.v32i2.35298
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    1. Rutayisire, J.Musoni, 2021. "Public debt dynamics and nonlinear effects on economic growth : evidence from Rwanda," MPRA Paper 110931, University Library of Munich, Germany.

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    More about this item

    Keywords

    Public debt; economic growth; Laffer-curve; developing economies; growth maximizing debt threshold;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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